Funds see no silver bullet in short-selling ban

Short-selling bans will fail to put a floor under the sagging share prices of European financial stocks and bonds until mutual fund managers are convinced policymakers have a sure-fire plan to save the Euro zone project.

Regulators in France, Spain, Belgium and Italy will impose restrictions on market participants who seek handsome profits by betting on falling share prices from Friday, in moves aimed at diffusing volatility and repairing confidence.

But a crackdown on speculative short-selling is unlikely to arrest sell-offs from institutional investors who have decided they have little stomach for big holdings in banks and indebted governments who might call on them again for emergency capital.

"Putting a little Band-Aid on a wound that needs many stitches won't solve the issue. All that it'll do is reduce the credibility of the person who had the Band-Aid idea," said Pedro de Noronha, managing partner at hedge fund manager Noster Capital.

By 0800 GMT, French lender Societe Generale was trading down 0.6 percent, while Spain's BBVA was 1 percent lower and Italy's Intesa Sanpaolo was flat.

Mutual fund managers have exited bank stocks and bonds in droves in recent weeks to counter a repeat of the blistering criticisms that they responded too slowly to the vagaries of 2008, losing their clients billions of euros in the process.

They have been unimpressed with the euro zone efforts to tackle soaring funding costs for Europe's weakest economies with piecemeal policies like bond purchasing programmes that effectively threaten the vitality of its strongest members.

"I can see the logic of why they are selling," Carl Astorria, global head of economics and asset strategy at Coutts, part of Britain's Royal Bank Scotland .

"We have been underweight financials in Europe and financials globally for a long time and we don't yet want to get involved. We'll stay out and we can see why others would want to follow us in that," he said.

The ban is likely to have little effect on hedge funds, who, ironically, are sticking with their holdings in bank stocks and who have few short positions on financials.

However, for the few hedge funds shorting European banks, the ban could actually force them to sell stocks as managers often match a short position with a long position -- buying a stock -- on another stock in the same sector.

If the fund is forced to close a short position, it may also have to sell the stock it owned, which could further push down financial stocks.

"I think that hedge funds have little influence in the market at the moment," one European trader said.

"Most of the selling comes from long funds, people who invested a lot in the market and are fearful amidst the current uncertainty. Investors didn't see much guidance from European officials on what the ECB and the European Financial Stability Fund will actually do. If there was a clear sustainable plan the market would buy it."

Industry bodies were quick to reiterate 2010 research findings from academics at the University of Amsterdam and the University of Naples Federico II, which showed short-selling restrictions during the 2008 crisis were in fact detrimental to liquidity and broadly failed to support stock values.

"It was only last year that the Committee of European Securities Regulators, the predecessor to ESMA, recognised in an official report that 'legitimate short selling plays an important role in financial markets. It contributes to efficient price discovery, increases market liquidity, facilitates hedging and other risk management activities and can possibly help mitigate market bubbles'," Baker added.

Ion-Marc Valahu, who helps run Geneva-based fund management firm ClairInvest, said he doubted the short-selling ban would provide much of a crutch for jittery markets in the long term.

"In the short-term it will help calm things down, but if you look at what happened at Lehman during the crisis, it didn't do much," said Valahu.

A white Fiat van rammed into pedestrians outside enjoying a late afternoon stroll on Las Ramblas in Barcelona on Thursday killing at least 13 people and leaving hundreds injured. The Islamic State group claimed responsibility for the attack.